Auditing (Inventories and Cost of Goods Sold)

12-22) At the beginning of your audit of Crestview Manufacturing Company's financial statements for the year ended December 31, 200X, the company president confides in you that Henry Ward, an employee, is living on a scale in excess of that which his salary would support.
The employee has been a buyer in the purchasing department for six years and has charge of purchasing all general materials and supplies. He is authorized to sign purchase orders for amounts up to $500. Purchase orders in excess of $500 require the countersignature of the general purchasing agents.
The president understands that the usual audit of financial statements is not designed, and cannot be relied upon, to provide absolute assurance that fraud and conflicts of interest will be discovered, although their discovery may result. The president authorizes you, however, to expand your regular audit procedures and to apply additional audit procedures to determine whether there is any evidence that the buyer has been misappropriating company funds or has been engaged in activities that were conflicts of interest.

List the audit procedures you would apply to the company records and documents in an attempt to discover evidence within the purchasing department of defalcations being committed by the buyer. Give the purpose of each audit procedure.

Text Book Problem :
Principles of Auditing & Other Assurance Service, by Whittington/Pany (15e)
Chapter 12 -> Inventories and Cost of Goods Sold

Solution Preview

To start, as he is authorized to purchase items up to $500, it is very possible that he could be making many purchases that could add up to a significant sum. The first thing that the auditor would want to do is perform random sampling of purchases to see if they actually were received by the store and are on store shelves. All one would need to do is randomly select a certain amount of purchases, and then go down to the receiving dock and check the receiving records to see if they actually were received ...